After seven years of negotiations, the Regional Comprehensive Economic Partnership Agreement (RCEP), the world’s largest free trade agreement (FTA) covering 30 percent of world population and more than one-third of global GDP, entered into force on January 1, 2022.
Against the backdrop of increasing global economic fragmentation, the RCEP was given high expectations as an alternative to the current multilateral system, which has been in limbo for seven years – The RCEP brings together a diverse group of Asia-Pacific nations that vary significantly in terms of size and institutions, demonstrating the potential for inclusive collaboration in the region.
Two and a half years have passed. How has RCEP impacted trade in the Asia Pacific region? How will RCEP shape trade patterns within the bloc?
The Asia Global Institute’s RCEP Trade Tracker, launched in June this year, monitors detailed trade data for all RCEP member countries and is updated quarterly. Utilizing the information from this tracker and external sources, we have identified four key stylized facts about the RCEP that have significantly influenced the regional and global trade landscapes.
Fact 1: Intra-RCEP total trade grew by 8% in 2022, slightly less than the 8.6% growth in RCEP trade with rest of the world
The economic integration within RCEP is fueled by a strong interconnection of production processes across borders and industries -- often referred to as the "Factory Asia" phenomenon. Following the implementation of RCEP, member countries have experienced a surge in intra-RCEP exports, especially in 2022, as they sought to leverage the newly established trade agreements.
In 2022, the overall growth rate of intra-RCEP trade was 8%, weighted by import and export values, which is slightly less than the 8.6% weighted average growth between RCEP countries and the rest of the world. On average, intra-RCEP exports grew by 11.5% in 2022, while intra-RCEP imports grew by 6.8% in 2022. (Due to data limitation, Brunei, Cambodia, Laos and The Philippines are not included in the computation.)
We also examined trade growth within each specific country. In 2022, all RCEP countries experienced a strong rebound in trade after the pandemic-induced slump. By 2023, trade had gradually returned to pre-Covid levels, explaining the sharp distinctions between export and import growth rates in 2022 and 2023, as shown in Figure 1 and Figure 2.
Among all RCEP countries, Myanmar stands out for its clear preference to trade with RCEP partners since the ratification of RCEP. This could be a result of multiple factors, including continued sanctions imposed by many advanced economies, Myanmar’s preference for Thai products, and its economic ties with China, Korea, and Japan. Similarly, China leveraged the opportunities provided by RCEP and exported significantly more to RCEP countries in 2022. Indonesia, Malaysia, and Singapore are increasingly turning towards RCEP as a prominent export destination, while Vietnam has been importing more from RCEP countries.
In contrast, Thailand, which has long practiced liberalized trade policies, leans towards trading with the rest of the world (non-RCEP countries). Thailand has not only fostered healthy trade relationships with RCEP countries, but also maintains significant ties with major economies including the US, Taiwan, and Hong Kong.
Fact 2: Increased intermediate good trade between RCEP countries
Some sectors have experienced faster growth in trade within the region following the ratification of RCEP. The most significant growth in trade has primarily been observed in raw materials and intermediate goods, including commodities such as salt, nickel, and chemicals. (see Table 1 and Table 2).
One of the notable examples is nickel trade within RCEP. In 2022, nickel exports surged by over 90%, and its imports also grew by 45%. This significant growth underscores the dominance of RCEP countries in the electric vehicle (EV) industry, which uses nickel as a critical component. It's noteworthy that the world's leading exporter of nickel (Indonesia) and the largest importer (China) are both RCEP members. Additionally, Japan, Singapore, and South Korea, which are frontrunners in the EV industry, also belong to the RCEP.
Another intriguing development is the remarkable increase in tobacco exports, which grew by 150% in 2022 and an additional 14% in 2023. Tobacco plays a significant role in various low- and middle-income countries within the RCEP, including Indonesia, Malaysia, and the Philippines. However, countries with higher income levels are the ones driving this escalation in within-RCEP tobacco exports. For instance, China recorded an exceptional 900% growth in its tobacco exports to other RCEP members in 2022, and New Zealand's exports to RCEP also expanded by 250% in 2023. Similarly, Singapore, Japan, and South Korea each recorded a jump of about 30% in tobacco exports to RCEP countries.
Fact 3: China, Japan and Korea trade less with each other, but more with other RCEP countries
RCEP is the first FTA to include the three biggest East Asian economies, China, South Korea, and Japan. The combined economies of these three neighboring countries contribute to nearly 80% of the total GDP of RCEP. And they are the biggest importers and exporters within the region.
Although geographically and culturally proximate, these three countries did not previously share a close trade relationship. Before the ratification of the RCEP, Japan had no bilateral FTA with the other two countries. Despite the presence of an FTA (CKFTA signed in 2014) between China and Korea, bilateral tariff rates between the two countries remained as high as 9%, considerably higher than the average most favored nation (MFN) tariff rate for either nation.
Considering the magnitude of these economies, trade among the three countries is anticipated to increase significantly once the RCEP comes into effect. But did RCEP successfully bring them closer? It’s still too early to tell.
All three countries have promised to lower tariff significantly– China has committed to eventually exempt tariffs on 86% of Japanese goods. Korea plans to increase the percentage of tariff-free Japanese goods from 19% to 92%. In addition to tariff cuts, the three economies also pledged to reduce non-tariff barriers and open more of their market to each other.
So far, none of these efforts have yielded any tangible outcomes. The trade volume among China, South Korea, and Japan has experienced a consistent decline from 2020 to 2023 when compared to their total trade (See Figure 3). In contrast, their respective trade with other RCEP member nations has been increasing, albeit with a slight dip in 2023.
More importantly, conflicts and miscommunications continue to appear even after RCEP took effect. China suspended all seafood imports from Japan last August in response to Japan’s decision to release treated radioactive water into the Pacific Ocean; the trade dispute between Japan and Korea has shown no sign of alleviation after multiple rounds of negotiation, as the two countries fail to reach a consensus on various economic and political issues.
Despite uncertainties, a silver lining emerged in May when the heads of government from China, Japan, and Korea convened in Seoul and announced their commitment to advancing negotiations for a trilateral trade agreement. The potential trilateral FTA details are unclear, but it is likely to surpass the scope of the RCEP, possibly being known as "RCEP+", according to government officials.
Fact 4: No direct trade gains observed for the ASEAN countries yet
RCEP is often promoted as an "ASEAN-led, ASEAN-centric" FTA. Indeed, the negotiations were primarily led by the Association of Southeast Asian Nations (ASEAN), with all its members, and most of its major trade partners, included in the RCEP.
Yet whether ASEAN will be the major beneficiary remains to be seen. About 20 percent of ASEAN’s trade is within the ASEAN (see Figure 4) and another 30 percent comes the “non-ASEAN 5” nations (RCEP members who are not ASEAN members, namely, China, Japan, Korea, New Zealand and Australia). Before RCEP, tariffs within ASEAN were already close to zero. And there is an FTA between ASEAN with each of the other 5 countries. In other words, there is limited scope for RCEP to further reduce tariffs or enhance trade within ASEAN.
After a brief period of decline at the beginning of the pandemic, ASEAN’s trade experienced a substantial increase in 2021 and 2022. Total trade value of 2022 was 36% higher than its 2019 level.
Yet the growth in within-RCEP trade does not appear exceptional when compared to ASEAN’s trade with the Rest of the world, suggests that the trade agreement hasn't yet noticeably amplified ASEAN's trade.
Though RCEP has little room to lower tariffs for ASEAN members, it has set clear goals to lower non-tariff barriers and to ultimately reduce trade costs by harmonizing standards. For example, RCEP sets a 48-hour target for customs clearance of goods and mandates that all member countries ensure transparency and consistency.
The 48-hour target will apply to all countries, but ASEAN nations are expected to see the most significant improvement in this regard.
Currently, the efficiency of customs operations in most ASEAN countries is below the world average (see Figure 5, higher score signifies greater efficiency), which implies there is significant potential for enhancement in this area. Many ASEAN countries lag in digital adoption and institution building, leading to lower efficiency and occasionally, corruption within the customs. Once these goals are achieved through institutional reform and investment in new infrastructure, trade costs within ASEAN will be significantly reduced.
Director, Asia Global Institute
Research Assistant, Asia Global Institute
Research Assistant, Asia Global Institute
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The University of Hong Kong
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